Tarun, One of my friend (who is an NRI) recently sold his property in India and fired a lot of questions on me viz.

1. I bought the property in 2010 at Rs. 1.20 Crores and now selling at 1.10 Crores then why I have to pay taxes in the form of TDS.
   
   Every assessee has to pay income tax on the capital gains arising on the sale of the property and not on loss (short term or long term depending upon the holding period of property— short term if held for less than 2 years and long term if held for more than 2 years) so in the applicable case he was not required to pay taxes but in case of sale of property by a non-resident section 195 of the income tax applies, which reads as follows: -“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or Section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. TDS and taxes are both totally different things. TDS will be deducted and adjusted against the applicable taxes (to be calculated on the basis of complete information related to the property being sold).
2. Is there any monetary limit for TDS in case of sale of property by NRI?This section applies to the deduction of tax without any minimum slab. Limit of Rs. 50.00 Lacs provided for in Section 194-IA in the case of the domestic seller does not apply for the NRI seller. TDS has to be deducted by the buyer in all cases of sale of property by NRI without any monetary limit.
3. Will it be deducted on Gross Value or on the Profit?Section 195 provides for deduction of tax at the time of credit or payment of such income whichever is earlier i.e. TDS has to be deducted on the income (capital gains) and not on the gross payment. But the problem here arises about how to calculate the capital gains. Section 195 does not provide for such a calculation mechanism. Assessee himself has to calculate the Capital Gains but the same has to be verified by the Assessing Officer and Section 197 of the Income Tax Act, 1961 provides for the mechanism. In simple language, this process is called for applying low rate of TDS Certificate. Any assessee who considers lower tax has to be deducted on the income attributable to him instead of the rates prescribed in the various sections of the Income Tax Act then the assessee has to apply to the Assessing Officer in form no. 13 along with following documents: –
   1. Power of Attorney
   2. Covering Letter
   3. Last Three Years’ ITR
   4. Computation of Capital Gains/Income
   5. Copy of PAN of Seller
   6. Copy of Passport of Seller/PIO Card
   7. Copy of PAN/TAN of Buyer
   8. Agreement to Sell
   9. Proof of Payment at the time of Agreement
   10. Property papers chain
   11. Proof of Payment at the time of purchase of property
4. What are formalities I have to comply with? How this tax will be deducted and deposited?In case of sale of property by the NRI generally, all the compliance burden is on the buyer.The buyer has to apply for the TAN and also has to comply with the normal provisions of the deposition of TDS i.e. TDS has to be deposited by 7th of the next month.The buyer also has to file the TDS return as per the normal provisions i.e. within 30 days from the end of the quarter and also has to issue Form 16A to the seller.So in simple terms buyer has to comply with the formalities and not the seller but if he wants to get the benefit of the low rate of deduction of tax then seller has to arrange this certificate namely called low rate of TDS certificate and in case seller is unable to arrange this certification from the assessing officer then tax at full value of transaction will be deducted @ 20% (as applicable in case of Capital Gains) plus surcharge and Health Education Cess as applicable. Rates of Surcharge depend on the income(transaction value) of the concerned seller but cess is fixed @ 4% on total of tax and surcharge.  The benefit of taxation @ 20% applies if the property sold is long term but in case the property in question is held for less than 2 years then tax at normal rates will be charged.
5. Will I be able to get it back as a refund from the department?The seller can claim a refund of extra tax deducted at the time of sale of the property as per normal provisions of income tax. Notwithstanding anything provided in this section seller of property is entitled to claim all the benefits available to him in the chapter of capital gains viz. saving taxation by re-investing in property or bonds etc.
6. Will I get interest on that refund?Yes the NRI is entitled to the applicable rate of interest on refund provided u/s 244A @0.50% per month (6% per annum) from the first day of April of the assessment year to the date on which refund is granted. However, no interest is paid if the refund amount is less than 10% of the tax paid

There are some other notable points in relation to the compliances related to the sale of property by NRI which are outlined below: –

1. Deduction of TDS is the responsibility of the buyer and not of the seller and if there is short/non-deduction of the tax then the department will issue a notice to the buyer and will collect from the buyer for the balance amount.
2. Since it is the responsibility of the buyer to deduct tax so the interest @ 1/1.5% pm or part of the month will be charged in case of non-deduction/non-deposition of TDS to the government exchequer.
3. The buyer is also responsible for filing the TDS return within 30 days from the end of the quarter with the department and in case of delay penalty @ Rs. 200/- per day will be charged.
4. Seller and buyer should file an income tax return in the year of sale of property whether or not they are having any income or even if full tax is being deducted to avoid any issuance of notice from the income tax department.

 

In this part of our discussion, we will elaborate on special provisions relating to Taxation of Non Residents and Foreign companies. These points are covered under chapter XII-A of the Income Tax Act, 1961 and section 115C Continue reading →